Five Key Lessons to Take from CIT

Getting out of this crisis just got considerably more difficult.

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The media's reporting that with the federal government unwilling to help, CIT Group (CIT) is likely to file for bankruptcy.

None of this is surprising. But there are some key lessons in all of this.

1. As I've often said, while capital wounds, liquidity kills. And CIT's an interesting example of a supposedly highly capitalized institution unable to obtain private funding.

2. Being a bank-holding company doesn't guarantee survival. And one need only look at the other 50+ bank holding companies that have failed this year to see this.

3. "Too big to fail" has been replaced with "too entwined to fail." And in CIT's case, while large in terms of assets, it wasn't adequately tied to other firms. (Now this isn't to say that CIT is unimportant economically, and unless others step up to take its place -- either directly or through the purchase of CIT's key businesses -- there will clearly be an economic impact.)

4. The finance-company model is dead. And in this, those non-banks that recently converted to bank-holding companies need to be seriously concerned, especially those without access to the Temporary Loan Guarantee Program (or TLGP).

Which brings me to my final point: the TLGP.

5. Of all of the alphabet-soup programs implemented during this crisis, I expect that economic historians will debate the TLGP the most. As we saw yesterday, the market has determined that those with access to it have ensured survival while those without access to it can fail. But with the word "temporary" in its name, the program is meant to have a finite life.

At the risk of going too far out on a limb, I'd offer that unless the new non-bank bank-holding companies are able to replace their existing unsecured debt with government-insured deposits, they have no exit strategy from the TLGP. Put simply, the commercial-paper market and the medium- and long-term debt capital markets no longer afford these firms' sustainable, stand-alone, cost-effective funding.

To my mind, the Treasury just threw a very large rock in the pool. And while I'm certain they looked at the ripples associated specifically with CIT, I don't believe that they saw the bigger wave they created. And unfortunately, from where I sit, they just made the financial system more, not less, dependent on government support.

As a result, extricating our financial markets from this crisis just became considerably more difficult.

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